UK's retail industry faces fresh headwinds this summer as consumer confidence drags at an all-time low while market analysts warn of a "bubble" in e-commerce bursting.
Current pressure on the retail industry is driven by a mix of rising house, energy and food prices, combined with unemployment rates that ticked higher in April.
Despite retail price mark-ups, the cost-of-living crisis has in turn reduced consumer demand for discretionary items.
To make matters worse, the Covid-19 pandemic appears to have artificially inflated consumers’ online buying behaviour only temporarily, analysts warn, which is starting to turn down and cause a hit on profits.
Figures from the Office for National Statistics and consultancy GfK show that consumer confidence in the UK is at the lowest point since records began in 2005.
Rising inflation, now at levels not seen in at least 25 years, is partly to blame for the lull in consumer buying power.
The consumer price index, or CPI, hit 9% in April (for the year to that date), the highest since the index began in 1997.
The last time the old retail price index reached present levels was in February 1982 when the Bank of England base rate was nearly 14%, according to AJ Bell analysts Russ Mould and Danni Hewson. They say the Bank of England is trailing “behind” the inflationary curve.
“The latest Misery Index score, for April, stood at 10.7, the highest since January 2013, but with inflation galloping higher that is likely to rise to levels not seen for over a decade,” Mould and Hewson said in an analyst note on Friday.
“This may explain why the GfK UK consumer confidence indicator languishes at a record low.
"The reading for April was minus 40 which may be one reason why economists at the OECD, CBI, IMF and others are becoming progressively gloomier about the UK’s economic prospects.”
The so-called 'Misery Index' formulated by economist Arthur Okun, which includes the impact of unemployment rates, ranked at a score of 10.7 for April, the highest since January 2013.
Furthermore, UK unemployment stood at 802,708, including only people who had been out of work for six months or less, from February to April, compared to 740,025 from January to March, according to ONS figures.
Meanwhile, the Consumer Prices Index, with housing costs factored in and illustrating how price rises are compounded by living costs, is on the rise and exceeded 7.8% in April, according to the ONS.
After several profit warnings from major retailers last week, some market analysts have further suggested that retailers may be in the midst of an e-commerce bubble, where online sales could have experienced an artificial surge as a result of lockdown.
Peter Garnry, Head of Equity Strategy at Saxo Bank, said that returns for the year to date in e-commerce were down 52%, meaning the sector's losses only came in second behind the casualties experienced in the cryptocurrency market.
“E-commerce was initially hit by the pandemic as everything stopped, but then the world came roaring back causing e-commerce stocks to surge like crazy,” he said.
He described a second phase of the so-called e-commerce 'bubble' where logistics costs went “vertical” and supply chain costs were disrupted in a way that ate into e-commerce profits, directly hit by the cost-of-living crisis.
One of the first indicators of this was Amazon.com Inc (NASDAQ:AMZN), Garnry said, when it posted an operating loss in its e-commerce business for the first quarter.
“When we look at the performance 2016 in our e-commerce basket it looks as if the entire industry went into a bubble caused by pandemic,” Garnry said.
“E-commerce stocks are down 66% over the past year having shredded almost all of their gains during the first phase of the pandemic.
"In hindsight it looks like e-commerce was in a bubble driven by a massive shift in spending from services to goods while interest rates plunged to record lows fueling equity valuations to astronomical levels.”
Retailers ASOS PLC (LSE:ASC) and Boohoo Group PLC (AIM:BOO) were also hit this month by the worsening cost of living crisis, with Asos reporting a rise in customer returns and both companies higher supply chain costs.
Asos cut its revenue and pre-tax profit guidance for the financial year because of rising customer returns and cost pressure across its logistics and supply chains.
Its stock dipped below the lows seen at the height of the pandemic in March 2020, having fallen 89% from March 2018, Garnry noted, as it slashed its pre-tax profit forecast from £100-130mln to £20-60mln.
“If the world economy is slipping into a recession then the cut to its revenue outlook might not be enough,” he added.
Tesco PLC (LSE:TSCO)’s UK sales meanwhile dropped in its first trading quarter as it warned its customers face “unprecedented increases in the cost of living”.
Value retailer Primark’s owner Associated British Foods PLC (LSE:ABF) meanwhile appeared to brush off inflation concerns today, posting significant growth in its UK sales as Primark trials a new Click & Collect function on its website.
However, on a like-for-like basis, the group's retail sales for the quarter dipped 9% below pre-Covid levels.
Retailers are now taking steps to sustain post-Covid-19 gains and reset growth to pre-pandemic levels.
Some, like Asos and Primark, plan to open new brick and mortar stores rather than bet exclusively on e-commerce to drive future gains, while others, Primark being among them, are investing in new online services as well as expanding on the ground.
Only time will tell whether they can bounce back to the kind of growth seen before the pandemic, amid rising interest rates that makes accessing debt more costly, ballooning inflation, and the possibility of a looming recession.